The First National Bank of Zanesville recently gained approval from the Office of the Comptroller of the Currency to move into the financial planning, brokerage, insurance and annuities businesses, in a move to help expand its market presence.

The $1.2-billion-asset parent company, BancFirst Ohio Corp., recently acquired Chornyak and Associates Inc., a financial planning firm which also sells insurance but is not a full-service broker. It receives a commission, however, if customers purchase the mutual funds the planners recommend. The bank already has a trust company with insurance capabilities, but it was a small part of its business activities, mainly selling life insurance and annuities, according to chief financial officer Kim Taylor. Taylor said the trust subsidiary also offers some customers brokerage products.

"This provides a higher level of financial planning services to our customer base," he said, explaining the bank will provide the firm with its list of bank customers to solicit products, and brokers already in the bank’s branches will refer customers to the new affiliate.

Chornyak is located in Columbus, 50 miles from the Zanesville headquarters, and provides the added bonus of giving the bank additional presence in that market, where it currently has only one branch.

BancFirst acquired the financial planner by issuing 82,000 shares of stock, valued at around $2 million. The company is expected to bring in revenues in the $1.2 million-$1.6-million range.

Huntington National Bank recently received approval to get its foot in the door of title insurance sales in Ohio, anticipating a time when banks in that state will be able to own title insurance companies entirely. An accompanying lawsuit could have a significant impact on financial modernization legislation.

The Columbus-based company received approval from the Office of the Comptroller of the Currency April 8 to own a 10% stake in a local title insurance agency, Mound and Forth Title Agency, Ltd. In the application letter from the bank’s counsel to the OCC, the bank said the only reason it was applying for a minority stake is that it is prohibited from owning a majority interest in the company by state law. It added that it believes the state law is inconsistent with federal law and is "a prohibition or significant impairment on the powers of a national bank under the National Bank Act to own and operate a title insurance agency "

The bank, along with the Ohio Bankers Association, is suing the Ohio insurance commissioner in federal court to rectify that situation. Oral arguments are scheduled for this week.

Jeff Quayle, general counsel for the Ohio Bankers Association, said the state rule barring banks, Realtors, homebuilders and others from owning a title insurance company or a controlling interest in one "flies straight in the face of Barnett." Barnett refers to a Supreme Court decision which overturned an antiaffiliation law that severely limited banks’ ability to sell insurance to their customers. While bankers are fighting the rule in court, the Ohio Association of Realtors is working to overturn it with state legislation.

He added that the model Huntington is following of minority ownership has been done by other non-bank companies, such as homebuilders.

Industry watchers believe the case could have far-reaching effects on the banking and insurance industries because of its impact on financial modernization legislation.

"If this goes through before H.R. 10 passes, then clearly national banks can sell title insurance and it would be much harder for them to hold the provision in the House version of H.R. 10 that prohibits the sale of title insurance," said Buzz Gorman, legislative counsel for the Conference of State Bank Supervisors.

So devoted to the ideal of customer service are bankers at Synovus Financial Corp. that some will work nights and weekends. That extra touch they believe will set them apart from competitors was highlighted when a customer called the head of private banking–a program only a year and a half old–on a Sunday night. He announced he was leaving the country for a trip in the morning and would need a passport. The banker opened up the customer’s safe deposit box and produced the needed document.

"The products we deliver are all pretty much the same, but where we’re going to beat the competition is we’re going to deliver them however and wherever the customer needs it. We have better relationships because we extend ourselves," said Walter M. "Sonny" Deriso, Jr., vice chairman of the board of Columbus, Ga.-based Synovus, and the executive in charge of the company’s "New Bank" effort.

The New Bank program means moving toward modernization of the company, which translates into delivery of products and services in ways that customers want, Deriso said.

The bank is stepping up catering not just to the wealthy–with the private banking program it’s rolling out to 10 more of its subsidiary banks from the pilot site–but to the ordinary customer’s needs. It recently completed a 14-month conversion to M&I’s data warehousing capabilities and can do more sophisticated target marketing.

The $10.5-billion-asset holding company, which maintains independent boards and charters at each of its banks, is gearing up to complete another chapter in its New Bank effort. By adding insurance bank-wide, and brokerage and financial planning services for all customers, the southeastern bank company hopes to round out its offerings and achieve what is becoming the holy grail for banks: to be the place where customers get all their financial products.

The three-phased introduction of the insurance subsidiary has begun at flagship Georgia-state chartered Columbus Bank &Trust (CB&T) and two other banks in Alabama and South Carolina. The final state in Synovus’s market, Florida, has somewhat simpler insurance regulations, and will be added after the pilot periods in the other three states.

After examining a study of other banks’ methods of offering insurance prepared by KPMG Peat Marwick, which showed most are not profitable yet, and speaking with its own bank managers, Synovus management decided not to acquire an insurance agency. It will instead offer insurance to its customers through a partnership with a third party, which has been chosen but will not be announced until June, Deriso said. The carrier will provide backroom operations, a call center and licensed agents who can work as consultants or specialist to customers with sophisticated needs, Deriso said. The bank plans to get customers to the insurance agents, who must be located in a separate area of the bank, by referrals from tellers and customer service representatives, and targeted marketing.

The first phase of the three-phase roll-out includes the simplest products for novice salespeople to understand: credit life and accident insurance which most banks have offered for years, and fixed annuities, which Synovus has offered for about a year. In addition, it will offer title insurance, through a partnership with a local firm, and worksite-related supplemental insurance for commercial customers with specialist AFLAC.

The bank is also creating a reinsurance captive for mortgage insurance. In that line of business the bank will deal with several carriers, the split depending on the amount of work done by the bank or the carrier. Because reinsurance is still a fairly new line of business for banks, Deriso said special approval would be needed from regulators. He added that he had discussed the bank’s plans with regulators in all four states as well as with the Office of the Comptroller of the Currency, and all were comfortable with the bank’s plans and indicated there should be no snags in obtaining approval.

The second phase, to begin in the fourth quarter, will offer homeowners and auto insurance. The third phase, to start late in the year 2000, will offer life, disability, long-term care and group disability insurance.

Deriso said in addition to having some employees trained to sell insurance, the plan is to have some of these specialists licensed to sell securities and be able to do financial planning for all customers. Currently, the banks can offer some customers a limited version of that service. Some of the specialists on the asset-management side of the bank can act as gatekeepers and refer some of the trust clients to the brokers. Whenever an annuity is sold, that customer has a financial profile done, a sort of minifinancial plan. But CB&T will begin piloting in May the use of what Deriso calls "superpeople," employees licensed to sell insurance and all brokerage products.

Another new program which Deriso said ties several of the bank’s financial services together, an asset management account, also requires specialist employees to sell it. In the pilot stage now and set to be rolled out in the second or third quarter, the wealthy-customer’s account has a brokerage feature and allows funds to be swept into an FDIC-insured account. The specifics of minimum account balance–probably around $10,000–and working with the data processor to clear all trades, are being worked out now.

Deriso is in the thinking stage now of the latest piece of the plan to offer customers as broad an array of financial services as possible: additional money management. He is grappling with whether to hire more money managers to complement the team that runs the company’s fixed income and equity funds, ranked by PIPER in the nation’s top ten, or to form an alliance to continue to get value from the $7 billion under management with an outside firm

The insurance underwriting industry won a sweeping victory when a panel of the 11th U.S. Circuit Court of Appeals, based in Atlanta, said insurance regulators have the sole authority to determine whether a hybrid bank or insurance product is banking or insurance.

Banking lawyers cautioned that the ruling conflicts with other recent court decisions, including two by the Supreme Court. Efforts to contact the Washington offices of American Deposit Corp., which has a pending patent on the product, were unsuccessful. It would be the only entity able to appeal the decision to the Supreme Court. Michael Crotty, deputy general counsel for litigation for the American Bankers Association, reacted to the decision by saying, "These guys just missed it. It is flat wrong.

"It flies in the face of several recent unanimous Supreme Court decisions, including Barnett, decided in 1996, and Valic II, which was handed down in 1995," he said. It also is contradicted by Valic I, handed down in 1959, which says annuities are securities and not insurance, Crotty said.

The court held that the National Bank Act is a minor law and is "trumped" by the McCarran-Ferguson Act when an analysis is made whether a product is banking or insurance. The case deals with a Montana bank’s effort to sell a fixed annuity as a bank product. The product, called a "Retirement CD," was advertised as providing tax-deferred treatment on earnings inside a bank’s federally-insured certificate of deposit. Upon maturity, the accumulated value of the product would be distributed to the owner in periodic payments, like an annuity.

"The Retirement CD was an annuity, an insurance product," said Gary Hughes, vice president and general counsel of the American Council of Life Insurance. "Equally important, the court noted that the Office of the Comptroller of the Currency overstepped his authority in 1994 by giving the product the green light. What this shows is that Congress, not the OCC, will decide whether banks or their affiliates will be allowed in the future to underwrite annuities and other insurance products," he added.

With his eye on pending legislation that would bar banks from underwriting annuities in operating subsidiaries, Hughes added, "If any banker had considered sidestepping Congress and underwriting annuities in a bank’s operating subsidiary, this should significantly dampen those plans."

But David Roderer, a banking lawyer in Washington, called the decision "backward-looking, static and simplistic." He explained that the court looked at the issue as if there were no hybrid products, only banking, insurance and securities products. He added that the National Bank Act, and the Supreme Court’s interpretation of that law "clearly indicate that the agency has the authority to adjust banking products to the times."

A federal court decision that limits national bank sales of insurance outside of small towns to credit-related products is "troublesome," but could set the stage for the reversal of two long-standing appeals court decisions contrary to existing precedent that the industry has wanted to attack for some time, sources said.

The decision Judge June Green handed down March 23 says national bank insurance sales are limited to small towns unless they are credit-related, and also says the Comptroller of the Currency exceeded its authority in declaring crop insurance a "credit-related" product.

Staffers at the OCC said the agency would appeal the ruling.

The decision was based on two precedents, set in 1968 and 1989. The courts held that Sec. 92 of the National Bank Act, which says that, "in addition to all other powers" banks are allowed to sell all types of insurance from offices in places of 5,000 or fewer, is an implied bar on national bank insurance sales outside of small towns.

Acting Comptroller Julie Williams had based her interpretation allowing Iowa national banks to sell crop insurance on another provision of the National Bank Act, Sec. 24(7th), the incidental powers clause. In approving the Iowa banks’ application, Williams had ruled that sale of such insurance is part of, or incidental, to the business of banking. But, in her decision, Green said that ruling "appears limited to a certain type of insurance known as ‘credit life’ and does not purport to stand for the notion that Sec. 24 (7th) can be used to authorize the sale of all insurance by national banks everywhere." But, she said, "crop insurance protects the farmer, not the lender, and is therefore not credit-related."

But David Roderer, a Washington banking lawyer, calls the decision "troublesome," and contrary to the Supreme Court’s 1995 ruling that the Comptroller has the authority under the incidental powers clause to reinterpret the National Bank Act to fit changing market conditions affecting national banks.

While troublesome, Roderer said, the Green decision allows banks and the Comptroller an opportunity to have appeals courts revisit the two older decisions, which the banking industry universally believes are contrary to the 1995 precedent.

In another sign of the converging financial services industry, a New Yorkbased life insurance company has won approval to provide trust services to its customers nationwide through a unitary thrift.

However, a banking industry lawyer said that in approving the application by Guardian Life Insurance Co., the Office of Thrift Supervision (OTS) has imposed new, "intrusive" restrictions on non-banks using unitary thrift charters to conduct parts of their financial services businesses. Institutions planning to apply for this type of thrift charter should be aware that the agency is now imposing new restrictions between broker/dealers and trust companies operated out of thrifts.

In its application, Guardian Life said a number of insurance, securities and investment companies, which operate mutual funds, are finding that the thrift charter is the ideal vehicle to provide nationwide trust services to customers. The new institution will be known as Guardian Trust Co. FSB, and will employ eight to 10 trust professionals.

The president of the newly-chartered institution, Francis Quinn, said Guardian, a $26-billion-asset life insurance and reinsurance firm, will likely launch its new service in June, after meeting several preconditions imposed by the OTS when it approved the new charter March 26.

Guardian will use its new unitary thrift to provide such nationwide services as trusts and individual retirement accounts through Guardian’s existing 5,000 employees and 3,000 agents, Quinn said. Most agents work through general insurance agencies; Guardian, a mutual institution, and its officials have said that it plans to remain one.

Guardian will feature multiple money managers, tax-sensitive investing and superior reporting capabilities to its trust customers, Quinn said. "Our options include separate account management, directed portfolios and mutual fund asset allocation services," he said. "We will not offer annuities as a product of the trust company. But, if an annuity is in the portfolio, we can manage it at the trust company.

"We see our role as providing sophisticated services our field associates can offer to their clients," Quinn said. "We don’t see ourselves as competing with the banks. There is a whole industry of nontraditional providers of trust services," he said. They are affiliated with securities firms, insurance companies and investment management firms, which include mutual funds companies.

However, a lawyer in Washington said the OTS’s approval "is unusually intrusive both as to what has to be done immediately and what must be done going forward, particularly as to the relationship between the trust and the securities dealing activities of Guardian."

The lawyer said the approval "imposes certain restrictions and arrangements we haven’t seen in the past. That seems to suggest that the agency is still grappling with issues as to the level of regulation that is appropriate and the level of freedom that should be enjoyed by trust operations in a diversified financial institution structure."

He said that one of the provisions that concerns him is language designed to "ensure that neither the broker nor the holding company dominates the federal savings bank to the extent that one is treated as a mere department of the other." The agency is clearly "seeking to ensure that there is adequate corporate independence so that the thrift is not just a department of the insurance company operations." The agency appears especially concerned with the independence of the thrift from Guardian’s securities brokerage unit, Guardian Investors Services, a registered broker/dealer.

Certain disclosures regarding trust operations, particularly in conjunction with securities brokerage, that must be made by Guardian Trust are new, the lawyer said.

But Quinn said Guardian is "comfortable with the terms of the order the OTS has issued. We were able to meet all the requirements that we understood were presented to us."

Despite banks’ apparent fervor to enter new financial services arenas, such as brokerage products and insurance, they have dropped the ball and now must scramble to avoid getting left permanently behind, according to a report released last week by the Bank Administration Institute and the Boston Consulting Group. The report adds, however, that a quick reversal of the current trend could send bank retail revenues skyrocketing.

The report, Putting It Together: Convergence Strategies For Banking, Insurance and Investments, issues the industry a stern warning, citing woeful statistics of its rapidly falling "share of wallet." It proceeds to offer specific advice to turn the bleak situation around, including quickly increasing banks’ commitment to insurance and other mass market products.

The study asserts that the European system of bancassurance, in which banks have fully integrated insurance and investment products with traditional retail banking, should be used as a model by American bankers. The report cites statistics of the 50% share of the life and pension market in France held by banks, and the 30% share in Spain. By comparison, U.S. banks have 1% of the market. The European banks’ costs are 50%-70% lower than independent insurance agencies in Europe, and the branch sales system sells three to five times as many insurance policies as the conventional sales system, the report said.

John Garabedian, a vice president at the Boston Consulting Group who oversaw the study, said banks have fallen down and let business go to other more aggressive financial service firms by only making "halfhearted" commitments to the new markets.

"Banks need to make a commitment to improving the consumer insurance experience and leveraging elements of their existing administrative, marketing and distribution infrastructure to provide these products at a lower cost and with wider margins. By using their own networks efficiently, banks have the potential to double their profit per customer," Garabedian said.

The study cited statistics showing banks’ share of the retail financial services wallet has slid to 34% in the late 1990s from 50% in 1981, and that banks are paying even more to garner new customers, the majority of whom do not turn out to be profitable. The study counters that woeful picture with the assertion that banks are "well positioned" to reverse the trend by getting into the mass market with insurance and investment products.

Like their more successful European counterparts, U.S. banks are more suited to the sale of insurance than traditional insurance agents, the report says, because of their existing administrative infrastructures and customer base, trusted brand and a lower-cost sales force. The report asserts that if banks made a major commitment to insurance and "a more narrowly targeted commitment to investments," retail revenues could jump by almost 50%.

Other strategies the report touts include selling more aggressively to women and members of Generation X, who have traditionally been under-tapped by traditional insurers and financial advisors. Also, the report advises bankers to market more aggressively cash management products that bundle checking accounts with investment products and offer limited investment guidance to first time and young investors, to maintain market share.

Banks selling insurance are running into a problem with what should be a slam dunk: selling homeowners’ insurance to customers who have just taken out a mortgage. Solving the quandary is one of the main goals for the industry, sources said.

The problem arises when a bank turns to its insurance carrier to underwrite a policy and the underwriter cannot write any more policies for a particular area. Similar to a quota system, insurers do not want more than a certain amount of coverage in specific geographical areas, because significant coverage could mean financial ruin in the case of a natural disaster. The industry learned this lesson back in the early 1990s after Hurricane Andrew ripped through South Florida, causing hundreds of millions of dollars worth of damage.

To ask an insurer to write more policies in an area than it deems inappropriate, a bank would have to be able to balance the insurer’s exposure in danger-prone areas by bringing more production in non-danger areas. Today, the party who is protecting the primary insurer, the reinsurer, charges the insurer more than it would be worth to take on the extra business. Because the primary insurer has committed to the secondary insurer to fix the concentration of losses, the primary insurer must pay a hefty fee to go over the limit. So, in this situation, the bank’s insurance agency must find another underwriter to write the policy–and it may also be at capacity for that area.

Sources said now the only thing to do is work to appease insurance carriers by bringing more business in other areas. But that has not proved easy.

"That is the one thing banks hope to be able to do, especially ones that operate in many states. They can help insurance companies keep their ratio limits in line to help balance out coverage in less attractive areas. I haven’t seen many cases where they can make that work. It’s very early in these programs and they haven’t generated performance to show how much volume they’ll be able to generate. It’s hard to convince (insurance carriers) you can bring value," said bank consultant Frank Caccione, of the Mitchell Madison Group.

Jeff Huff, manager in sales for property and casualty for one of the bank-in-insurance industry leaders, BB&T, said the problem of insurance companies struggling to make the homeowners’ insurance line profitable is a tricky one. If a bank’s insurance unit has enough contractual relationships with enough carriers, he said, a policy can usually be found; it’s just that it will not be at a sellable price in the market. This is because some giant carriers that distribute only to their own agents, such as State Farm or Allstate, will probably have lower prices. But, at the same time, Huff said, "The bigger the bank and the more spread they have, the harder it is to have the right company for all the opportunities that it would have to provide insurance. Most banks are having some heartburn over this. How do you be all things to all people, but do it efficiently with as few carriers as possible? This is getting a lot of tension now as the industry consolidates."

He said BB&T has tackled the problem by trying to work with all of its carriers to understand their strategies, weaknesses and strengths. "We try to direct business to companies’ strengths as best we can. We hope they’ll look favorably on us and allow us to carry the banner into new territories for them. You just feel your way through the thing," he said.

A group of insurers has moved the ball forward on the important issue of onshore securitization of catastrophic risk, which banks may soon be interested in as investments. But important hurdles remain to be negotiated.

The new instrument may also help banks hedge risk stemming from concentrations of loans that could be adversely affected by a hurricane or other natural disaster.

While approving a draft of a model act designed to allow insurance companies to securitize their risk within the United States, the NAIC Working Group on Securitization stalled on further efforts to bring the concept into reality.

The life insurance industry and other institutions are looking at investing in such arrangements as soon as property and casualty companies get state regulatory approval to do so.

The exposure draft of the model, approved last week at the NAIC’s spring meeting in Washington, D.C., calls for assets to be carried at fair value. It will also require fully active cells and funded dollar-for-dollar transactions within the protective cells, and will ban derivative-based deals–for now.

Jeffrey Alton, chief accountant for CNA Insurance Company, said that under the proposal, insurers will have to file a plan of operation with each insurance department. "It should be very clear to a regulator what exposures preside in those cells." Alton said he did not support the concept that the protected cell should have a separate risk based on a capital charge of 10% that stems from concerns of potential tax liabilities.

CNA has pushed the hardest for quick approval of the catastrophe model so it will be in place by the next hurricane season.

Questions continue to arise over whether the assets contained in the protective cells will be enough to sustain the liabilities. Mike McCarter, vice president of accounting for American International Group, isn’t worried. "These are high quality securities," he said.

He said that within the month, he hoped to be able to hook customers up to the bank’s brokerage unit, Midwest Capital Management, Inc., so they can execute trades on-line. A little bit of that is making sure Gold Banc "gets in front of the money," he said, adding that banks should get more aggressive in the securities area. "We have been letting investment strategy go to Wall Street as opposed to letting that money go to the market through the bank." The securities unit finished 1998 with 27% of net interest income for the bank up from 16% in 1997. Gullion said the bank’s goal for the brokerage unit is to be in the 30% range within a year. Part of the expansion of the firm, bought in March 1998 for $4.25 million, will come from the ongoing project of putting investment centers in each of the 28 locations.

The company also provides wholesale services to banks throughout the Midwest. Gullion said that, typically, Gold Banc wants its service companies, which include The Trust Company and Gold Banc Insurance Agency, to shoot for a 20% return on revenue. "We are looking for not just 8-10% growth a year, but 30%–not just in terms of earnings-per-share growth, but income. That is a factor of improving efficiencies and income streams and growing the company in terms of acquisitions," he said.

The insurance agency, while centralized, is a work in progress, as management evaluates how best to deliver the product in the future. The goal is to have an agent in 75% of the branches. The company sells property and casualty, life and health insurance. Gullion said the bank is not interested in getting involved in bond underwriting, professional insurance, or any areas "requiring a high degree of expertise."

The company is at work on a business plan for The Trust Company, acquired at the end of last year. The idea is to bring the service to all banks by mid-year, with officers in the larger branches full-time and videoconferencing to the smaller branches. Now, the firm has full-time trust officers at two banks, insurance agents at five banks, and investment retail brokers at four banks.

Gullion said the bank is always looking for new acquisitions, the criteria being number one or two market share and strong leadership by bankers who believe in the community banking model.